exhaust smoke, and drop in gas mileage

oil level has nothing to do with anything. Oil cleanliness has even less to do with anything. It could be anything from needing a tune-up to needing rebuilt. The oil light tells you that it has low oil pressure. Most Vanagons do. The engine has excess clearance in the bearings causing it to have low oil pressure. Compression test would help. You should also look to see it there is oil in the coolant or coolant in the oil. These are notorious for head gasket failure. Start there.

Oh and the oil smells like gasoline:(

now that is important... Those fuel injectors are known to leak after awhile. If ya got one stuck on it would wash past the rings and get into the crankcase. I test them by pulling them out of the head, but not loose from any of the lines, then jumper the fuel pump relay (turn on the fuel pump without turning over the engine) and with your injectors in a baggie see which one(s) leak. Good Luck!

catalytic converter possibly failing try disconnecting wires coming from exhaust pipe chances are 20 year old veh do not need emissions chk sometimes you also have to drill a small hole in sensor as well